Bank of England says Brexit slowdown could lead to recession

LONDON (Reuters) - The Bank of England said Britain’s economy would slow sharply, and could even fall into recession, if the country voted to leave the European Union and said there were limits to what the bank could do about it.

In its starkest warning so far about the impact of an “Out” vote in the June 23 referendum, the central bank said sterling could fall sharply and unemployment would probably rise.

“In that scenario we would expect a material slowing in growth, a notable rise in inflation, a challenging trade-off,” BoE Governor Mark Carney told a news conference.

“Of course there’s a range of possible scenarios around those directions, which could possibly include a technical recession,” he said in response to questions from reporters.

Jitters about the referendum are already weighing on the economy and the central bank trimmed its growth forecast for this year to 2.0 percent from February’s estimate of 2.2 percent, even if Britain votes to stay in the EU.

Carney said there were limits to what the BoE could do in response to an “Out” vote. “Monetary policy cannot immediately offset all the effects of a shock,” he said.

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Prime Minister David Cameron, who along with finance minister George Osborne, has tried to focus voters on what Brexit would mean for their incomes, said the central bank “couldn’t be more clear” that leaving the EU was a risk.

Opinion polls suggest British voters have been relatively resistant so far to warnings about the economic costs of Brexit, with voting intentions in many polls roughly evenly split.

But Carney’s comments ahead of Scotland’s 2014 referendum on the costs of independence were viewed as swaying some voters.

He is due to make a high-profile speech at London’s Mansion House a week before the vote, alongside Osborne, giving them another platform to speak about the dangers of Brexit.

Supporters of Brexit argue Britain would benefit from less EU regulation and could strike better overseas trade deals on its own. Some have accused Carney of over-stepping the central bank’s line of political neutrality.

Sterling rose to a six-day high against the dollar after the Bank’s policymakers voted unanimously to keep interest rates on hold, pouring cold water on talk that at least one policymaker might vote for a cut. Gilts were little changed after the announcement.

Governor of the Bank of England Mark Carney delivers his monthly inflation report at the Bank of England in the City of London, Britain, May 12, 2016. REUTERS/Dylan Martinez

The BoE said half of sterling’s 9 percent slide over the past six months was probably due to the referendum and said it could “depreciate further, perhaps sharply” after an “Out” vote.

Britain’s government and international bodies have also warned against leaving the EU. The International Monetary Fund is expected to weigh in again on Friday.

“UNWISE WORDS”

Former finance minister Norman Lamont, who served under prime minister John Major in the 1990s, said the BoE’s warnings of economic trouble after a vote to leave carried their own risks.

“The governor should be careful that he doesn’t cause a crisis,” he said. “If his unwise words become self-fulfilling, the responsibility will be ... the governor’s alone.”

Carney said it was the BoE’s duty to speak about the short-term economic risks of leaving the bloc.

The Bank cut its forecasts for growth in the next three years due to lower productivity and more caution from households about spending. It sees growth at 2.3 percent next year and in 2018, down from 2.4 percent and 2.5 percent in February.

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These forecasts worked on the assumption that Britain would vote to stay in the EU. The only concession made to the referendum was to assume that around half the slide in sterling over the past six months was temporary.

In two years’ time, inflation is forecast to reach a fraction over its 2 percent target, essentially unchanged from the forecast in February.

Most economists expect the BoE to raise interest rates early next year if Britain stays in the EU.